Obama: Soft on Health Insurance? Part 2

More on whether Obama's backing away from real health care reform.

In an earlier column ("Obama: Soft on Health Insurance?"), I expressed some worry that President Obama was backing away from his campaign promise to create a government health insurance program for the self-employed, employees of small businesses, and people whose employers don't provide them with health insurance. My worry arose from an exchange at a White House health care forum between Obama and Sen. Charles Grassley, who with four other Republican senators had signed a letter stating that creation of such a program would be a deal-breaker for health care reform. Here it is:

Sen. Grassley: The only thing that I would throw out for your consideration—and please don't respond to this now, because I'm asking you just to think about it—there's a lot of us that feel that the public option that the government is an unfair competitor and that we're going to get an awful lot of crowd out, and we have to keep what we have now strong, and make it stronger.

President Obama: OK. Well, let me just—I'm not going to respond definitively. The thinking on the public option has been that it gives consumers more choices, and it helps give—keep the private sector honest, because there's some competition out there. That's been the thinking. I recognize, though, the fear that if a public option is run through Washington, and there are incentives to try to tamp down costs and—or at least what shows up on the books, and you've got the ability in Washington, apparently, to print money—that private insurance plans might end up feeling overwhelmed. So I recognize that there's that concern. I think it's a serious one and a real one. And we'll make sure that it gets addressed, partly because I assume it will be very—be very hard to come out of committee unless we're thinking about it a little bit. And so we want to make sure that that's something that we pay attention to.

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As I noted earlier, the Republicans aren't wrong to fear that creation of a new public plan might put the private plans out of business. Employer-based private health insurance has been costing steadily more and delivering steadily less for some time. Existing government health insurance programs like Medicare and the State Children's Health Insurance Program have consistently been shown to be more cost-effective than private insurance. A recent report by the Commonwealth Fund, a nonprofit dedicated to improving the health care system, estimated that a public plan along the lines Obama proposed during the campaign could set its premiums 20 percent to 30 percent lower than private health insurance plans. That strikes me as an argument for "public plan choice" rather than against it. But in his comments, Obama seemed to agree with Grassley that it would be wrong to "overwhelm" the private insurance market by making this new government health insurance program too cost-effective, or too generous, or too wonderful in some other, unspecified way. Maybe we shouldn't have a public program at all!

Mainly, though, I didn't understand what Obama was saying.

Seeking enlightenment, I consulted a recent paper ("The Case for Public Plan Choice in National Health Reform") by Jacob Hacker, the University of California-Berkeley political scientist who first conceived this particular scheme. In my earlier column, I'd linked to Hacker's paper and cited its observation that Medicare spending had during the previous decade grown less rapidly, per capita, than spending for private health insurance. This time I lingered over Hacker's discussion of why Medicare was more cost-effective. Two reasons seem especially relevant to this discussion:

Because of its sheer size, Medicare enjoys greater leverage than private insurers in negotiating what it will pay doctors and hospitals. On average Medicare pays 81 percent of what private insurers pay to doctors and about 75 percent of what private insurers pay to hospitals. When Congress enacted Medicare's prescription drug benefit in 2003, it prohibited the government from negotiating volume discounts with drug manufacturers—that would be socialism!—but other federal health insurance programs not subject to this absurd restriction typically pay for drugs about half what private insurers do. Although physicians like to complain that Medicare's penny-pinching is driving doctors out of the program, Hacker found that the number of doctors participating in Medicare is actually growing faster than the number of Medicare patients. Those old folks are hard to get away from. Medicare represents about 20 percent of the U.S. health care market. (Government health care programs in general represent about 45 percent.) Private insurers worry that a new public program would exploit similar economies of scale, putting them at a competitive disadvantage.

Doctors and hospitals recoup some of their losses from Medicare by shifting a greater portion of their operating costs onto private insurers. According to one California study, every $1 that Medicare eliminated in payments to hospitals added 17 cents to the hospital bills of private patients. The same study observed similar, though less pronounced, cost-shifting with Medicaid. Taken together, Medicare and Medicaid cost-shifting accounted for 12 percent of the cost increase in private health insurance during the previous decade. Private insurers fret that a new public program would lead to more cost-shifting.

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These may be the factors Obama had in mind when he said, "[P]rivate insurance plans might end up feeling overwhelmed." But it's hard to feel too sorry for private health insurance companies. Through mergers, they've been expanding market share at a pretty smart clip themselves. According to a 2007 study by the American Medical Association, in 96 percent of the country's metropolitan statistical areas, there exists at least one private insurer with at least a 30 percent share of the commercial market. Medicare and Medicaid cost-shifting may account for 12 percent of the cost increase in private health insurance, but what accounts for the other 88 percent? While Medicare has put the squeeze on doctors and hospitals, insurers have put the squeeze on policyholders.

Hacker has lately been wrestling with the question of how to create a level playing field for private and public health insurance plans, and he graciously showed me a draft paper touching on this problem. I am not convinced, after reading it, that he cares much more about it than I do. "Everyone says they are for a level playing field," he writes, "but what most critics of the public plan idea really mean is that they do not want a new public health insurance plan to have any inherent advantages." True competition, Hacker writes, "does not require competitors be equal" but rather "that they have an equal chance to succeed if they are equally good at doing what consumers want." Exactly.

Under the Obama plan, private health insurance companies would compete with the public plan to cover people whose employers didn't give them health coverage. These private insurance companies would receive a government subsidy in exchange for abiding by certain restrictions regarding premium increases, deductibles, etc. Hacker proposes that the subsidies be the same for the public and private plans, that rules governing premium rates and marketing be the same, that minimum benefit levels be set, and that public and private plans both be required to take all comers. "Relative disparities in plan costs" should be reflected in "the relative prices that potential enrollees see." If the Commonwealth Fund is correct, that would still make the public plan 20 percent to 30 percent cheaper than the private.

Perhaps these are the sort of concessions Obama has in mind. If so, I doubt they'll mollify conservative critics like Grassley. What will Obama do? I don't have a lot of faith that any plan to step up regulation of private health insurance will make much difference. Most such proposals, Obama's included, amount mainly to price controls, a regulatory approach that in the past hasn't worked very well. Health insurers should know this better than almost anyone. Employer-based health insurance owes its very existence to wage controls put in place during World War II. Barred from negotiating over wages, employers offered employees health insurance instead.

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Jettison the public plan and you've pretty much given up on health care reform. If we try to regulate our way out of this mess, the best true reformers can hope for is that the private health care system spins quickly out of control, forcing a government takeover—a plausible scenario, in my view. Better to skip any interim step where we make things worse before we make things better. Here's hoping Obama's seeming willingness to compromise on the public plan, as expressed at the White House forum, was insincere. Politeness on this point would be acceptable. Flexibility would not.

[Update, 2:40: Shortly after I filed this Hacker forwarded me an interview from Feb. 2009 in which he outlined three reasons to believe the public plan wouldn't kill off the private health insurance policies they would compete against under the Obama campaign plan:

First, some people are going to want to be in a private plan, period just as some people continue to buy cars that Consumer Reports says are less reliable than the norm because they like how they look or drive or value the decal on the front. Second, and more seriously, the private plans will be able to do things like selectively contract with small numbers of providers that a stable, inclusive public plan simply cannot do, and some people will value these innovations. Third, we don't know how the private plans will react to real competition, since they've worked so hard to avoid it till now. Perhaps they will discover inner wellsprings of cost-consciousness that we didn't know they had.

I don't think Grassley and other opponents of a public plan would find these arguments reassuring. If the first two are correct then I would expect the health insurance business to shrink down into a boutique "niche" industry. I don't think Grassley's willing to settle for that. The third argument sounds to me more like a taunt. I remain convinced that this conflict is irreconcilable, and that the Grassleys will just have to give way.]